Confronting the Deep-Tier Dilemmas
Four problems that decide whether the model scales
Eight parts into this series, the model is on the table: a buyer’s credit carried down the chain, a platform to run it, a legal chain to hold it up, and an ESG engine to steer it. What remains are the problems the ADB/BAFT note itself flags. They aren’t technical failures. They are problems of trust, incentives, dependency and borders, and each one can stall the model even when everything else works.
9.1 The Trust Deficit
DTSCF needs a view of the whole supply chain, and the party best placed to provide it is the one least inclined to. The ADB/BAFT note names the obstacle plainly. Key suppliers, especially in tier 1, resist sharing details about their own supply chain and commercial terms with the anchor buyer. The fear is that the buyer will use the information to bypass the direct supplier, particularly where tier 1 adds no material value, and then deal with tier 2 directly. There is a second concern: that the information could be used to gain negotiating power on commercial terms.
The note calls this a paradox: the information is confidential and complex to share, and it is also a key driver of DTSCF’s success. Without the data, the visibility the programme needs stays out of reach.
The fear is rational. A tier-1 supplier that is a genuine manufacturer has little to fear, since the anchor can’t easily replace it. A tier-1 supplier that mainly aggregates or trades has a good reason to guard its map. A design that ignores that difference will fail with exactly the suppliers whose cooperation it needs most.
The note’s answer is technology that provides permissioned access. It describes data integrity and transparency with permissioned access and selective visibility that safeguards sensitive commercial and transaction details while enabling enough transparency to understand the complete supply chain. It adds a governance mechanism on the platform to set the rules, including encryption or access restrictions for confidential information. Its table of challenges lists technology that can support information exchange with encrypted data points as the mitigant.
What “selective visibility” could look like in practice is below. This matrix is my illustrative design, not a specification from the note:
The design logic is that the anchor learns what it needs (that the supplier exists and is linked to its chain, that the obligation is performing, and what the ESG score is) and does not learn what would let it bypass anyone or squeeze anyone (commercial terms and prices). The financier needs the identity and payment details to pay each tier, and that goes no further than payment.
Technology cannot supply the last ingredient, which is a reason to take part. The ADB/BAFT note says DTSCF can make the anchor buyer its suppliers’ preferred buyer, and tier-1 suppliers also gain financing from the programme. Visibility has to come with benefits, or it will be refused. The independent verification brokers from Part 7 help here: a certified attestation can show a deep-tier supplier’s standing without exposing who it is.
9.2 The Willingness to Pass the Benefit
The second dilemma sits inside the mechanism itself. The note states that DTSCF relies on the willingness of the preceding tiers to pass on the benefit of the payment undertaking by splitting and transferring it down the chain. At any tier, the supplier may choose not to exercise that right and hold on to the full benefit. If this happens at tier 1 or tier 2, the note says, it undermines the purpose entirely.
The incentive to hold is easy to see. A tier-1 supplier already has its own cheap finance, so holding the claim costs it little, and keeping the benefit is worth something. Passing it on gains it nothing unless the programme is designed to reward it.
The note proposes one remedy: let the previous supplier retain a minimum interest, as an incentive, if it transfers commensurate benefit to the next tier. Its table of challenges adds a second mitigant, which is to let suppliers discount receivables on a need basis. Part 4 added the research angle. In the Huo, Xue and Lotfi model of a three-tier chain, a win-win outcome appeared only when the transmission fee fell within a particular range. Too low, and the incentive fails. Too high, and it starves the lower tiers.
The difference is easy to picture. These shares are illustrative:
The structure you choose changes how much discretion a supplier has. This is my analysis, drawing on the legal models from Part 3:
A final caution: the incentive must not become a tax. A retained interest sized to cover tier 1’s effort is a fair price for being the conduit. One sized to capture most of the benefit just moves the problem.
9.3 The Domino Effect Risk
DTSCF’s greatest strength is also its greatest dependency. Every tier is priced on the anchor buyer’s credit, which is why the credit risk does not deteriorate with depth. It also means every tier is exposed to the same single name.
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The note spells out the consequence. If the anchor’s creditworthiness weakens, or it decides to discontinue the facility, the effect on the supplier ecosystem could be significant. In a traditional SCF programme, only tier-1 suppliers are hit, and these are often stronger players with possible access to alternative financing. DTSCF reaches the weaker companies, the SMEs. The note warns this may trigger a domino effect and a systemic impact across sectors, especially if financiers have built other financing products on DTSCF flows.
The risk has two parts, which behave differently. This split is my analysis:
Flow risk is the quieter one, and DTSCF makes it worse in one respect. The ADB/BAFT note lists, among the anchor’s benefits, that it may be able to extend financing terms with suppliers. Longer terms plus cheap early-payment finance leave suppliers heavily dependent on the programme. If the programme stops, they are left holding the long terms without the bridge.
Two real cases show the pattern in SCF generally, though neither involved deep-tier structures. When Carillion collapsed in 2018, a London Business School case study reports, Fitch Ratings described reverse factoring as a key contributor to the collapse. The Greensill failure in March 2021 showed the same dependency on the financier’s side: the trigger was the withdrawal of its insurance cover, after which Credit Suisse suspended about $10 billion in linked funds, and Greensill’s UK entity went into administration on 8 March. The lesson from Greensill is about concentration inside the financing infrastructure, not a verdict on SCF itself. S&P’s coverage later in 2021 found little lasting effect on the availability of SCF, as banks expanded their offerings.
The note’s mitigants are careful monitoring and control of the anchor’s performance and strategy and of suppliers’ dependency on it. Its challenge table adds engaging reputable, responsible anchor buyers and stringent due diligence and risk monitoring by the financier. Combining the note’s mitigants with general practice, a deep-tier programme could add:
9.4 Currency and Cross-Border Complexity
The fourth dilemma is the one the note says has not been solved. DTSCF spans currencies, jurisdictions and regulatory controls, and the note observes that cross-border DTSCF has not yet been deployed as far as the authors are aware.
- The currency mismatch. Tier-1 exports are typically denominated in major currencies such as the US dollar, euro, pound sterling, yen, renminbi or Indian rupee. Sourcing from tier 2 and below may involve other currencies. Smaller suppliers often operate exclusively in their local currency, so a claim denominated in the anchor’s currency doesn’t match what the supplier needs, and a mismatch adds to the complexity.
- Exchange controls. Many emerging economies run exchange controls and policies that closely monitor export realisations and import payments through their central banks. The note warns that DTSCF could affect these tracking mechanisms when receivables, or the right to receive payment, are tokenised or partially assigned down the chain, and that the complexity grows when the assignments involve foreign suppliers. Its advice is to involve regulators in developing innovations like DTSCF.
The mitigant it lists for FX is the involvement of financial institutions with experience managing FX risk, and its call to action is to foster collaboration within the banking industry on a common solution that mitigates FX risk for SMEs.
The options for the currency mismatch come down to who holds the exposure between financing and maturity, typically a matter of weeks or months. This is general practice, offered as my analysis, not content from the note:
For exchange controls, the aim is to keep the regulator’s trail intact. Design principles, again, my analysis:
The takeaway
The four dilemmas share a shape. In each, an individual actor has a reasonable motive to act in a way that stops the system from working: a tier-1 supplier guarding its map, a supplier keeping a benefit, an anchor withdrawing a facility, and a regulator protecting its own tracking. None is solved by technology alone, and each has a design response.
The ADB/BAFT note ends with a call for joint action: a forum, working groups on legal frameworks, KYC and AML clarity, education, fintech partnerships and standardised documentation. That is the right order of priorities. The deep-tier model will scale at the speed at which these dilemmas are answered, and many of the answers depend on the parties agreeing on rules together.
Sources and checks
- ADB and BAFT, Deep-Tier Supply Chain Finance: Unlocking the Potential (May 2024): information barriers, transferring benefits, the domino effect, currency considerations, the challenge table (Appendix 3), the stakeholder benefits table and the call to action.
- Huo, Xue & Lotfi (2023), Discrete Dynamics in Nature and Society, on the transmission-fee range (see Part 4). The study is model-based.
- Greensill and Carillion: a London Business School case study on the fall of Greensill, the UK Treasury Committee report Lessons from Greensill Capital (2021), an S&P Global Market Intelligence report (November 2021) and an administration timeline. These cases concern conventional SCF and its providers, and no deep-tier programme was involved.
- The visibility matrix, the fear-by-fear design responses, the stock-versus-flow split, the controls table and the FX options and principles are my analysis and general practice, not findings of the note. Recourse terms and hedging arrangements vary by programme and jurisdiction.
- The benefit shares and the access-to-alternatives bars are illustrative.
- This article is not legal or financial advice.
